CHAPTER STUDY OBJECTIVES
1. Analyze the effect of business transactions on the basic accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset is increased, there must be a corresponding (a) decrease in another asset, or (b) increase in a specific liability, or (c) increase in stockholders’ equity.
2. Explain what an account is and how it helps in the recording process. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity items.
3. Define debits and credits and explain how they are used to record business transactions. The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, common stock, retained earnings, and revenues are increased by credits and decreased by debits.
4. Identify the basic steps in the recording process. The basic steps in the recording process are: (a) analyze each transaction in terms of its effect on the accounts, (b) enter the transaction information in a journal, (c) transfer the journal information to the appropriate accounts in the ledger.
5. Explain what a journal is and how it helps in the recording process. The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effect of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared.
6. Explain what a ledger is and how it helps in the recording process. The entire group of accounts maintained by a company is referred to collectively as a ledger. The ledger keeps in one place all the information about changes in